The SA Reserve Bank (Sarb) has cut the repo rate to 7% which was expected given the benign outlook for inflation. Izak Odendaal, chief strategist at Old Mutual’s Symmetry, notes the interesting bit from Sarb, quoting from its policy statement: "Over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs. It is important to sustain this progress, and to minimise uncertainty about the longer-term objectives of monetary policy.

“Therefore, the MPC (Monetary Policy Committee) now prefers inflation to settle at 3%. In line with this, we have decided to aim for the bottom of our inflation target range, of 3-6%. We welcome the recent moderation in inflation expectations and would like to see expectations fall further. This would expand policy space and make our framework more robust to shocks. We will use forecasts with a 3% inflation anchor at future meetings. The South African Reserve Bank will also continue working with the National Treasury to complete target reform and achieve permanently low inflation."

This is quite extraordinary that Sarb rather than National Treasury is lowering the inflation target from 3-6% to 3%, when that policy mandate resides with the government, notes Stephen Hanival, chief economist at the Department of Trade and Industry.

This suggests no further rate cuts for now, but it is a positive development if we take a longer-term view. There will always be inflation cycles, but structurally lower long-term inflation will benefit the South African economy and also support a rerating in its financial markets.

Until that happens, we remain cautious of further shocks to the downside for the ZAR.

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